Following the mutual fund market can become a full-time job, a hobby or a sport! The degree to which you understand it is directly proportional to the time you are prepared to spend studying it. If your balanced perspective on life doesn’t include spending nights and weekends poring over prospectuses and financial statements, you can still learn a lot with this simplified approach. All of the learning tools can be acquired easily and cheaply at your local news-stand.
Our national business papers, the Globe & Mail and National Post, produce various periodic mutual fund reports that can be your textbooks.
The Globe, for instance, produces its monthly report on the third Thursday of each month. This report shows the 1, 3 and 6 month and 1, 2, 3, 5 and 10 year compound returns. The funds are grouped by like-categories and the averages, medians, highs and lows are reported within each category. Each fund’s returns for each time period is reflected in bold if it out-performed the average for its category for that time period.
Every quarter, the Globe produces a 15 Year Summary. This is organized in a similar fashion but shows the past 15 years of simple returns. Again, above-average returns for a particular fund are denoted in bold.
On a quarterly basis, the National Post’s regular monthly report is augmented with a “portfolios” report. This is an invaluable document that can save you the time of poring over those prospectuses. The information given varies with the kinds of mutual funds.The chart for Canadian equity funds shows, for instance, the percentage of foreign asset holdings in the fund. This may be important to you if you want to lever your foreign holdings beyond 20% to 36% by having the Canadian fund manager invest his or her full 20% within the fund. The chart also shows the fund’s emphasis in the various sectors of the economy. This may be important to you if you have your own views on where we are in the economic cycle.
The chart for Canadian bond funds shows, for instance, the percentage of foreign bonds. It also shows the allocation of the portfolio holdings across maturity periods and the average term-to-maturity for the portfolio as a whole. The term-to-maturity information tells you where the fund manager is placing your money on the yield curve. Lastly, it shows the allocation between government and corporate borrowers. The two-sided coin of “risk and return” comes to bear in a bond portfolio. Government borrowers earn a higher credit-rating due to their unlikelihood of default; corporate borrowers, even blue-chip ones, have lower credit ratings than governments because of the (even tiny) risk of default. The reward for assuming higher risk with a corporate borrower is, of course, higher returns. Thus, the chart tells you how the bond manager is pursuing yield: longer maturities or riskier lenders.
The chart for international equity funds shows the country allocations around the world. It is useful to know this in planning how your funds are invested globally. If you own multiple foreign funds, there may be significant duplication, or glaring holes, in your world weightings. If you have personal belief, for instance, that Japan is a good place to invest, then either you must invest in a Japan-specific fund, or you must analyze the weightings of broad-based funds to ensure they have positions in Japan.
At AFT Trivest, we often refer to the “character” or “cohesion” of a new portfolio that we review. Some portfolios have no cohesion, no sense of direction. Armed with the list of your mutual fund holdings and the afore-mentioned “textbooks”, you can amass a lot of data to assess your portfolio’s character. If it does not measure up to what you intended, then you may need to re-jig your holdings.